As we mentioned a couple of weeks ago, the new tax law passed in 2017, and effective in 2018, has serious impacts for single fathers. The most glaring of these impacts – which also seems to be the least covered – is that it it completely does away with the deduction for spousal support (also known as ‘alimony’ or ‘maintenance’; we use the terms interchangeably below). Here’s what you should do to deal with this.
Up until now, the payors of spousal support were allowed to deduct the amount of alimony that they paid from their Federal taxes. On the other side of the equation, the recipients of spousal support were required to declare it as income.
With the new change, spousal support recipients are no longer required to declare any alimony they receive as income, which in turns means that you, as the support payor, don’t get to declare it.
This can also have the effect of pushing support payors into a higher tax bracket; in fact some think this was a main impetus for the recent change to the tax law. Even though you may be hit with a high spousal support payment, because you will not be allowed to deduct it, you will still be in that higher tax bracket even though you are being forced to pay an expense over which you have little-to-no control.
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Now, in theory, this new tax law affects only divorces which are not finalized by the end of this year (2018 – so 12/31/2018).
But, in practice – ah, in practice. First, here are the relevant sections of the new tax law – these provide that these sections apply to:
“(1) any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2018, and
(2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.”
Let’s treat these sections one at a time.
Section 1 says that the new rule (spousal support not being deductible) applies to any divorce or separation instrument (i.e. a document such as a divorce agreement or order from the court) which is executed (generally meaning signed by both parties and/or a judge) after December 31, 2018.
So far so good.
Now let’s look at Section 2, specifically the language that says “modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.”
Let’s put this in plain English. What this really means is “the new tax law, which bars deducting spousal support from your taxes, will apply to any modification of an already existing agreement or order of the court, even if that modification is done after December 31, 2018, so long as the modification includes langage saying that the new tax law applies.”
This is a gotcha sure to get lots of single fathers and ex-husbands (and a few mothers and ex-wives) who are paying spousal support.
It may be that they will be modifying the order because there truly was a good reason.
But you can bet that the lawyers for lots of alimony recipients will be finding reasons to go back to court specifically to take advantage of this. After all, it will be a cash windfall for the spousal support recipient, so long as they can slip that language (such as “This order is to be treated under the new tax law of 2017, so that spousal support is no longer an income event for the recipient”) into the new order.
Now consider this: In many, if not most, states, a change in circumstances is considered to be a legitimate reason to have the court review support amounts.
The change in the tax law is a change in circumstance.
It remains to be seen how many courts will agree that this change in the tax laws is a sufficient change in circumstances, but on the face of it we believe that many, if not most, courts, will consider this as justification enough to look at modifying an existing order for support, given the substantial impact it can have on raising the support recipient’s discretionary income (because they won’t have to claim the spousal support that they receive as income any more, and so it becomes nontaxable).
So what can you, as the support payor, do to protect yourself?
The first thing is to have a firm understanding of what we have discussed above. Then you should have a conversation with your attorney to make sure that they understand this change (most family law attorney are not tax specialists – many of them are unaware of this change). If you get hit with a request for any sort of modification to your existing orders, make sure that your attorney knows that you want to be sure they don’t slip in any language which would change the status of the deductibility of the alimony you are paying, and that if they try to you want to fight it vigorously (unless of course fighting it would cost you more than losing the deduction).
If you don’t have an attorney, and you get hit with a modification request, you absolutely need to get an attorney (unless, again, the amount you stand to lose by losing the deduction is less than it would cost to hire an attorney). If you go in to such an action without an attorney, you will almost certainly lose, because the judge can choose to include that language in their order, and quite possibly will otherwise.
Now, if your separation or divorce is not yet finalized, then you want to push to have it finalized before the end of 2018, and put in there language that any modification will not be subject to the new tax law. More on that in our upcoming article on why you should get divorced in 2018.